The Effects of Taxes Generally
A tax shifts the supply curve UP by the amount of the tax.
The price does not normally increase by the amount of the tax
Forward shifting the tax - the consumer pays part of the tax as the price rises.
Backward shifting - the producers pay part of the tax when the market price does not rise by the full amount of the tax
An example
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The Effects of a Tariff
Terms:
Specific
Ad valorem
Combinations
Domestic market share increases, foreign share decreases.
Domestic producer surplus is increased but domestic consumer surplus decreases.
There is deadweight loss.
Small Country - the tariff does not cause the world price of the good to change
The price simply shifts upward by the amount of the tariff
Effects on CS, PS, DWL
The tariff is entirely forward shifted
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Large Country
The reduced quantity from the tariff causes the world price to fall.
Some of the tariff is backward shifted to
foreign
producers - the tariff applies to foreign producers only.
Beggaring thy neighbor
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The Effects of a Quota
Quotas are direct trade restrictions
Absolute quota - a number
Tariff rate quotas - amounts in excess of the quotas are subject to tariffs
Non-tariff barriers
Quota effects
CS reduced
Increase in both domestic and foreign producer surplus for those with quota rights.
Governments can sell quota rights and collect
quota rents
from foreign producers
Small Country
The usual: DWL, increased domestic PS, foreign PS (if no quota rents), increased domestic producer share
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Large Country
"Voluntary" Export Restraints VORs
Why VERs?
Basically and absolute quota
An agreement between foreign producers (or their government) and the domestic government
Not normally regulated by international trade organizations because they are "voluntary"
Quota rents can be made by foreign producers with quota rights
The US vs. Japan "voluntary" restraints
Both foreign and domestic producers benefitted.
The VOR's limited the quantity only - foreign producers moved upscale
European producers benefitted
VER effects
Export Subsidies and Countervailing Duties
What are export subsidies?
Dumping
The Costs and Benefits of Trade Barriers
First and second-best remedies
The costs of protection
Examples
